Maize trade in Southern Africa
The Gravity Model
Borrowed from physics, and the name is the clue. Big economies pull harder, and distance pushes trade apart.
Newton said the pull between two objects grows with their masses and falls away with the distance between them. Trade behaves in a strikingly similar way. Two large economies trade more with each other than two small ones do, and countries close together trade more than countries far apart.
So the model predicts trade between any two countries from their economic size, measured by GDP, and the distance between them, with adjustments for things like sharing a border or belonging to the same trade agreement.
I used it to work out what actually determines how much maize moves between SADC countries.
What it cannot do
It is one of the most reliable empirical regularities in economics, and it does not explain why. It tells you that distance suppresses trade. It does not tell you whether that is transport cost, or unfamiliarity, or delays at the border, and those have very different answers in policy terms.
Fitting it to real data also raises two further problems, which is why it never travels alone. See panel data and the Tobit model.
The equation
ln Xij = β0 + β1 ln GDPi + β2 ln GDPj + β3 ln Dij + Σ δkZk + εij
- Xij
- maize exported from country i to country j
- GDPi, GDPj
- the size of each economy
- Dij
- the distance between them
- Zk
- the yes-or-no extras: a shared border, a common language, membership of the same trade agreement
- εij
- everything the model does not explain
- β, δ
- the numbers the data is asked to supply
Everything is in logarithms, which is what makes it readable: each β is an elasticity, so β3 of about −1 means a one per cent increase in distance goes with a one per cent fall in trade.
Further reading
- Head, K. and Mayer, T. (2014). "Gravity Equations: Workhorse, Toolkit, and Cookbook", Handbook of International Economics 4. Read it.The standard modern survey of the model, and unusually readable for a handbook chapter.
- Anderson, J. and van Wincoop, E. "Gravity with Gravitas: A Solution to the Border Puzzle".Why distance alone was never the whole story, and what the simple version leaves out.
From An analysis of maize trade in the Southern African Development Community, MSc (Agricultural Economics), University of Pretoria, 2012. Read it in UPSpace.